After its wild swings over the last couple of weeks, the crypto market has settled into a period of relative stability, at least among major coins. The bitcoin price is flat on this time yesterday while ethereum has declined by around 2%.
Binance’s BNB is breaking the mold, adding around 2%, as other top ten coins trend lower. However, Terra’s luna has lost almost 20% as decentralized finance (DeFi) coins are rocked by drama.
If you started buying crypto during the fizzier months of 2021, recent volatility might have left you with whiplash. Wasn’t Bitcoin just at an all-time high in November? It can be hard to stay calm when markets start to shift, but it’s a lot easier to make smart moves if you have a plan.
- Keep emotions out of it. It’s okay to feel anxious, but don’t let anxiety dictate financial choices. Emotional trading can lead to badly-timed trades, like selling when prices are lowest or buying at a peak due to FOMO.
- Think ahead. Buying and holding isn’t right for every asset, but during a market downturn, consider your long-term goals. Did you buy with the intention of selling many years in the future? If so, it’s probably ok to stop refreshing that tab and take a deep breath.
- Consider dollar-cost averaging. Dollar-cost averaging is a popular strategy for reducing the sting of volatility and taking emotions out of trading — it involves buying a smaller amount of crypto every week or month no matter what the market is doing.
- Trade within your limits. Are you planning to “buy the dip?” Remember: No matter how confident you are about a particular asset, you should never put in more than you can afford to lose. (And when in doubt, speak to a trusted and certified financial advisor.)
- From avoiding FOMO to having a plan, 5 key ways to manage a crypto down cycle
How to minimize your losses (and even make savvy moves) during a falling market, according to a Coinbase tutotrial.
Since its inception in 2009, the Bitcoin and cryptocurrency markets have seen many cycles of growth and decline, even within the larger ongoing trends known as bull and bear markets. While it’s true that each market dip has so far been followed by a recovery and significant growth, periods of decline can be stressful and hard to navigate for experienced traders and beginning investors alike.
Here, we discuss five strategies that you might want to follow during a market dip in order to hold on to the value in your portfolio, avoid emotional trading, and lose less sleep.
#1 – Don’t fall prey to FOMO and FUD
Staying on top of the latest news and trends in the cryptocurrency space is crucial, but too much information can definitely be a bad thing. This is especially true in market downturns, where it’s all too easy to be overcome by your instincts and make some badly timed trades.
FOMO (fear of missing out) and FUD (fear, uncertainty, and doubt) are common terms in the crypto space, and can have a stronger influence on our choices to buy and sell than many of us would like to admit.
FUD generally refers to a negative market sentiment, caused by some rumor, unfavorable news article, or prominent figure expressing concerns about a particular market or asset. This can have a negative effect on the price as traders sell their holdings expecting further price decreases. FOMO is the opposite, speaking to a trader’s tendency to get carried away with wishful thinking after seeing positive price action or news, sometimes overlooking fundamental signals in a haste to jump aboard the next rocket ship to the moon.
Remember: No one can predict the future, and no single person’s advice is better than doing your own research and coming to your own conclusions. In some cases, influencers and publishers can actually have a vested interest in causing FUD or FOMO in order to manipulate the markets in a given direction. When learning about the latest updates across cryptocurrency markets, always try and confirm with multiple sources.
#2 – Set clear goals, diversify, and only trade within your means
No matter how confident you are in a particular asset, you should never invest more than you can afford to lose. The last thing anyone wants is to be caught in an emotional rollercoaster waiting for positive price action as the price of their portfolio slowly drops.
Most savvy investors also choose to hold a number of different kinds of assets long-term to diversify their portfolio — from alternate cryptocurrencies to stock market index funds.
It’s often said that crypto doesn’t sleep. Cryptocurrency markets are well known for their volatility and to counter this, crypto investors should predefine their trading strategies, and if possible, their entry and exit points.
Even if you had access to every bit of information available, a sudden black swan event, hack, or tweet from a high-profile individual could cause prices to plummet. This is why it’s crucial to plan ahead and to take steps to mitigate your losses should some kind of sudden crash occur.
Investors could consider fixed strategies like dollar-cost averaging (the process of buying or selling small amounts over regular intervals), which could help a crypto buyer completely avoid trading with their emotions, or having to stare at the charts 24/7.
Remember: It’s very easy to get carried away while holding volatile assets like cryptocurrencies. Trading can be a very high-risk activity, and especially in a bear market, and investors should aim to set goals that balance minimizing potential losses with achieving potential gains.
#3 – HODLing and long-term thinking
While the saying that “it’s not a loss until you sell” is only partially true, it does carry some weight. If the value of your assets has gone down since you bought them — called unrealized losses — they are only realized once they’re sold for less than your purchase price.
Through the years, Bitcoin has consistently trended upwards over the long term. Even if prices are falling due to a temporary market correction or a longer bear market, history shows that prices are likely to recover eventually due to economic drivers like scarcity. Many people believe that this limited availability will cause the price of cryptocurrencies like Bitcoin to continue to rise over time. If your investing timeframe is on the longer side (years instead of weeks or months) negative price movement can be viewed as being temporary.
Holding for long periods has to date been a proven strategy, with Bitcoin emerging as perhaps the most successful major asset of the last decade.
Remember: In countries such as the US, holding cryptocurrencies for longer periods of time can also be beneficial in terms of taxation. For example, holding for one year or longer may be more favorable than selling in the short-term.
#4 – Be ready to ride out the dip or take profits
One of the safest options for avoiding crypto volatility and protecting yourself during a market dip is to convert some of your volatile crypto holdings for more stable assets. This can help an investor ‘lock-in’ their balance and reduce their risk and need to actively manage their portfolio and stress levels in a cryptocurrency bull market.
Stablecoins like USDC aim to maintain their value at a fixed price — and by converting part of your portfolio into stable-value assets, you lower your exposure to price changes while the markets are in a lull.
But also remember that selling everything at once, called capitulation, can easily cause crypto holders to lose out if the market suddenly rebounds. This is why it is so important to map out an idea of what level of profit and loss you would be comfortable with before you’re forced to make decisions under pressure.
Remember: Many investors today choose to move in and out of stable assets as part of a larger withdrawal and buy-back strategy, which can help gradually grow their portfolios if the timing is right. This isn’t easy though, and even the most experienced investors often fail to time their entries and exits correctly. (Again, for many investors, dollar-cost averaging can be a good way to avoid even attempting to time the market.)
#5 – See the opportunities
Even when the crypto markets are falling, there are opportunities if you know where to look. Where others see a dark and cold crypto winter, keen investors see a new window of opportunity to get their favorite assets at a discount and turn a profit.
“Buying the dip” is a popular way for traders who felt priced out of previous gains to get into the market or increase their positions.
Even within a downtrend, there will still be small peaks and valleys as the market fluctuates. Traders that have brushed up on their technical analysis skills can stand to benefit here, using that knowledge to predict these short-term movements and capitalize on them by buying the short-term lows and selling the highs.
Short selling, or betting that an asset’s value will fall, can also be a good strategy to turn a profit during dips.
Activities like staking and DeFi yield farming can further help level out returns and provide support to make sure your actual crypto balance is always growing, even in a bear market or downtrend.
If you believe an asset will eventually be worth more, dollar-cost averaging works whether markets are up or down! In fact, you get more crypto for your dollar during down cycles.
Remember: These kinds of activities (with the likely exception of DCA) are not for the faint of heart, and may actually result in significant losses — or at the very least greatly increase the amount of time you spend in front of a screen watching stressful price charts.